RISK ASSESSMENT

Confirmed emergence from recession

After narrowing almost 1% in 2017 due to low energy prices and fiscal consolidation, growth returned in 2018, and is expected to pick up in 2019 on the back of the recovery in non-oil sectors (especially manufacturing and services) in line with higher energy prices. Additionally, rising oil production (although limited) following the OPEC’s decision in June to ease output restrictions will contribute to growth performance. Business confidence also supports this trend: in the third quarter of 2018, Saudi Arabia’s Purchasing Manager Index was higher than in the first half of 2018, presumably supported by higher oil prices, as the latter is still the main driver of economic activity. Indeed, nearly one third of fiscal revenues, 70% of GDP and 80% of export revenues come from the oil sector segment. Nevertheless, growth will remain far below its annual average of 5.3% between 2010 and 2014. Privatisations across food, schools, health care and desalination could also engender new investments. However, pressures on profit margins due to rising input costs will remain in place, resulting in longer payment terms in the private sector. These would be restrictive factors on investments, which have been declining since 2016.

The recovery in private consumption that started to accelerate in 2017 is expected to continue in the coming quarters on the back of the government’s recent initiative to reinstate annual bonuses for public workers from the start of 2019 (they had been cut under austerity measures in September 2016). On the other hand, loan growth remains soft as higher oil prices have not yet been reflected in liquidity conditions. Rising interest rates due to the currency peg regime, which pushes the central bank to hike its rates in line with the US Federal Reserve, represent a challenge for investments and consumption dynamics by raising funding costs.

Budget deficit to narrow again

Saudi Arabia’s 2018 third quarter non-oil revenue jumped nearly by 50% compared to a year earlier, while government spending rose by about 25%. The rise in oil prices will facilitate reducing the fiscal deficit as a proportion of GDP. However, rising spending will slow the pace of the reduction. The authorities estimate the budget will be balanced by 2023 on the back of subsidy cuts, as well as the introduction of taxes and fees. The recovery in non-oil sectors will also support fiscal revenues. Higher oil revenues will allow the government to increase its capital and social spending in the coming period. As long as oil prices remain above the kingdom’s fiscal break-even oil price – estimated at USD 73 for 2019 by the IMF as of November 2018 –, the authorities will continue to spend to support the overall economic growth and the private sector through funding of infrastructure initiatives and possibly other incentives in order to achieve the economic diversification within the Vision 2030 programme. Due to the fiscal deficits recorded since 2014, the public debt level has increased, but it remains at modest levels relative to GDP. Additionally, Saudi Arabia’s immense financial buffers will continue to give the government some flexibility to adjust the level of fiscal spending: the central bank’s net financial assets were estimated at USD 490 billion in 2017 (equivalent of 28 months of imports) as per the IMF. The current account surplus is expected to increase gradually in line with higher oil revenues. Within its economic diversification strategy, the country aims to attract increased FDI to support the nascent industries and megaprojects (e.g. the NEOM megacity). Nevertheless, the country’s need to import capital goods necessary to sustain this economic diversification may reduce the pace of growth of its current account surplus in the medium term.

Political stability will be maintained

Despite rising international pressures on the kingdom following the murder of Saudi journalist Jamal Khashoggi, it seems unlikely that the United States will impose punitive measures on Saudi Arabia. Even if such measures were to be imposed, their scope would remain quite limited due to the close geopolitical, economic, military and strategic alliances between the two countries. Saudi Arabia is expected to maintain its close ties with the United States, which would also provide some stability to oil markets. The next municipal elections are set to be held in 2019, but turnout will likely be unsubstantial. Although the regional stability seems to be at stake in Yemen, the likelihood of a quick end to the war remains low for now. Further escalation of tensions with Iran, on the other hand, would weigh negatively on the business environment.